Construction management » Intessa group

Construction management

  • Feasibility study and design
  • Tender and Procurement
  • Construction and putting into operation
  • Project registration
  • Management, operation and maintenance

INVESTMENT RISK MANAGEMENT

EPC CONTRACT RISKS

EPC contract concept was introduced by financiers as an optimal solution for investor risk management at the stage of financing and construction. The more investors choose EPC the more contractors decide to use this model to increase contract amount and its return. But while these models solve investor's problems the contractors face big risk factor which cannot be correctly evaluated at the initial stage.

Such EPC companies participating in major projects with deferred profit have risk of debt burden and uncertainty of economic scenario development. Risks which they take to their balance become more complicated in the work with foreign countries. Though EPC projects have bigger margine most of the risks are not covered by the companies - EPC contractors.

One of the reasons of this tendency is that a lot of companies still have no idea about EPC and cannot understand the necessity to manage risks correctly at required time and therefore they do not have enough experience. Wrong project evaluation results in unpleasant finacial consequences for the companies.

We can make a conclusion that because of the growing complexity of projects this tendency will likely result in consolidation of EPC contractors in the following years and only the few of them can work within EPC independently.

EPCM contract

EPCM-contract (EPC Management) is used only when EPCM contractor that has expert knowledge on integration of the entire project shall take responsibility for its complete performance delegating in its turn some EPC packages to various EPC contractors.

In such cases the EPC contractor is responsible for contract integration and general management. The key point is the absence of direct responsibility of EPCM contractor for project cost and schedule. The project promoter shall be responsible for observation of budget and any deviations from the forecast values and delays in work schedule.

At the same time this model is successfully used in oil processing, metallurgical and petrochemical projects where highly competent engineering knowledge is required in each project discipline. As a rule such project teams are formed of several teams and even several dozens of contracting teams.

Special cases of EPC contracts: BOT, BOO, BOOT

BOT, BOO, BOOT* concepts appeared at the beginning of 1990 with a view to optimize ROI projects. These models are mostly used in construction of infrastructure projects such as airports, roads etc.

In BOOT projects the EPC-contractors after construction completion have a project for getting profit for a certain period of time. At the expiration of this period EPC contractors transfer it for management to the state or any other beneficial owner. The return of investor's investments shall be considerably delayed but BOOT advantage is that risk on the legal entity. As a rule project organizers create a company specially for the project or hire a company for risk management.

It should be noted that EPC model (EPC/LSTK and other infrastructure BOT / BOO / BOOT-based projects) cannot be considered for use in high-tech application, e.g. nuclear power stations projects where high expertise level is required at each stage and there are serious risks. As for nuclear engineering practically the projects are made on P&C contracts.**

Let's summarize: why EPC contract and not conventional scheme?

1.GUARANTEE OF PLANNED FIGURES

Risks at all project stages make final results uncertain. Risks are caused by many factors:

  • a little bit different project decisions  – deviation from technology
  • alternative suppliers
  • alternative equipment,
  • site adjustment etc.

Finally because of the deviation from technology we have different dates, cost, volume of products, operating cost etc. Pass-through liability of EPC contractor is the gurantee of planned result.

2.INVESTMENT EFFICIENCY

  • Project  schedule controllability

    As EPC contractor sees all project implementation processes he can synchronize and integrate various processes, reducing time schedule. Apparent advantage of shorter project implentation periods is financial efficiency of the investments:

    - Investment cost reduction % per year x number of years

    - Reaching earlier project capacity, shorter project payback period

    - Return on technical solutions

  • Profitability of designed engineering solutions

    Starting from project concept development the quality of technical solutions directly affects the return on the project, selection of equipment and dates. It is EPC contractor's experience and BIM allow to develop optimal technical soulutions.

    Legal motivation of EPC contractor responsible for final result before reaching project capacity should be remembered. The project investment efficiency is not the concern of the Contractor who develops only the project documentation.

  • Reduction of cost of risk included

    EPC contractor's experience and professionalism allow to assess risk correctly and take measures reducing their impact and thus reduce their cost.

  • Bank project financing

    The use of finacial leverage is always more preferred than the use of corporate assets. If EPC contractor has proven experience in project implementation it has more chances to get external financing for the project than with conventional schemes.

    LSTK – turnkey constructon with fixed amount
    Engineering, Procurement & Construction (EPC)

    * Built, Operate and Transfer (BOT)
    Built, Own, Operate (BOO)
    Built Own, Operate and Transfer (BOOT)

    ** Procurement And Construction

INTESSA Group и Eurasia Engineering & Construction – management of construction projects

Engineering potential of the holding, extensive experience in supporting construction projects, partnership with Sicim S.p.A. , a major international construction company allowed Eurasia Engineering & Construction approach the market of EPC / EPCM-contracts.
As of today the Company has extensive intellectual and material resources for implementation of any complex project in Kazakhstan.

Projects

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